Are You Ready for the Networked Economy?

American business is dividing into three worlds. Where individual companies end up will profoundly affect how well they -- and the U.S. economy -- compete in the 21st century

It's a brave new economic world. or perhaps worlds would be a more apt word to use, given that American industry is rapidly fragmenting into three distinct economies: the Networked, the Kluge, and the Provincial. A company's future increasingly depends on which of the three defines its dominant business activities.

The Networked economy consists of densely packed concentrations of entrepreneurs and companies in urbanized areas that generate virtually all the nation's globally competitive, high-wage industries. These highly specialized companies flourish because they can rapidly team up to manufacture products for world markets. Some examples include the small-scale, world-beating exporters and technology developers in Silicon Valley and San Diego, the Research Triangle biomedical centers in North Carolina, and auto-production specialists in the Midwest.

The nation's Kluge economy -- the concentration of public-sector bureaucracies, universities, and closely aligned private companies in government-related industries like utilities or defense -- exists virtually side by side with the Networked economy. (Kluge, pronounced "klooj," is software programmers' slang for code that is an ill-assorted collection of poorly matching parts, forming a distressing whole.) Although Kluge institutions are America's least-productive resources, they control urban politics.

All told, the Kluge and the Networked economies generate about 45% of total U.S. nonfarm employment, or 50 million jobs, of which 15% to 18% are directly accounted for by the government -- the primary Kluge constituency.

Watching from the sidelines in the growing southern and intermountain western regions of the country is America's Provincial economy -- the back-office service providers; lower-wage, lower-skill producers; and urban corporate refugees whose interests now dominate national politics. Once an industrial afterthought, the Provincial economy now generates about 35% of total U.S. nonfarm employment, or 40 million jobs.

The Networked economy is where a company wants to be. Of the three sectors, only it offers the high wages, profits, and skills that improve America's standard of living. The Provincial economy trades technological prowess and upward mobility for relatively rapid job growth in lower-paying, less-skilled activities. And the Kluge economy -- built on an increasingly shaky, discredited public-sector foundation -- is the least likely place for a company to flourish in 21st-century America.

The Networked economy developed because cutting-edge industries, like the Hollywood entertainment industry or the aerospace industry in Washington State, demand specialized companies and individuals that can work together to manufacture products rapidly. Urban regions in particular offer the critical mix of bottomless talent and clustering of companies that supercharges high-wage, high-skill sectors. It's no accident that the world's most technologically sophisticated economies are found in metropolises like Tokyo, Seoul, Taipei, and Los Angeles.

Unlike its Asian counterparts, however, America's Networked economy is constantly under attack by those who strive to preserve the Kluge economy. Composed of the last surviving caste systems in the United States -- government, educational institutions, hierarchical businesses -- the Kluge economy was once instrumental in fostering metropolitan development. Over time, however, it stagnated; today its long decline feeds one of the most self-defeating kinds of politics in U.S. history.

Public-employee unions, for example, think nothing of endangering their constituents' future by threatening an ever-expanding parade of plagues -- from race riots to Dark Age epidemics -- if jobs are cut from the public rolls or options for more efficient government are pursued. Universities, once an urban magnet, now frequently repel creative companies and entrepreneurs with their contempt for the private sector.

Turned off by Kluge rhetoric, the Networked economy is steadily migrating from central cities to less dysfunctional areas, like northern New Jersey; Sonoma County, north of San Francisco; and Burbank and Santa Monica. While even the most productive and clean company faces constant regulatory, tax, and social demands -- no matter how ill-conceived -- in the urban Kluge strongholds, it is at least left alone in the nation's suburban and rural peripheries. In many cases, migrating businesses can bargain for favorable treatment, if not outright subsidies, from their new communities, treatment that partially compensates for losing the skills, dense business contacts, and irreplaceable product-development opportunities in the regions they left behind.

Perversely, the Kluge economy uses that tragic exodus as justification for more government subsidies to stem the tide of fleeing businesses, further alienating Networked companies, reducing the local tax base, and producing yet another destructive round of Kluge apocalyptic rhetoric.

All of that feeds the growth of America's Provincial economy, which self-consciously styles itself as a more moral, less "Klugey" alternative for Networked businesses. But behind the hype is a decidedly unattractive reality. Far from building globally competitive industries, Provincial economic development is driven by the redeployment of less competitive businesses (generic, standardized manufacturing; financial back-office services; and the like) to low-cost areas. Its high-growth core is an honor roll of America's low-skill, low-wage states: Utah, Nevada, Louisiana, Georgia, Arizona, and Oregon. Self-congratulatory and smug, the Provincial economy offers America a 19th-century answer for 21st-century competition.

The interplay of the three economies creates crucial, but still unrecognized, challenges for America and American businesses. The nation's high-skill, high-wage industrial growth is throttled by the dominance of Kluge politics in urban centers. The Provincial industries that America fosters outside its stalemated urban regions offer the nation a one-way ticket to a second-class society: low-wage jobs that will migrate again if regional workers seek better compensation; bottom-end products and services dependent on high-value-added knowledge fostered elsewhere; and because of tax breaks and other relocation incentives to businesses, less money available to pay for schools, technology, and other critical engines of upward mobility. So there will be fewer resources to cope with the country's underclass, a problem even the most remote Provincial states cannot hope to evade.

Yet, the peculiar feature of American politics is that there is no champion for the Networked economy. Democrats are the standard-bearers for the Kluges. Trapped by their bureaucratic, public-sector base, they can offer only the most leaden, 1930s-era-type metaphors (the "information superhighway" or the "National Information Infrastructure," for example) when they even pretend to address Networked-economy issues.

The Provincial economy is solidly Republican. Superficially, it promises a high-tech but family-value world, combining the security of small-town America with Internet links to maintain urban contacts. Networked businesses know, however, that faxes and electronic mail are poor substitutes for the constant interpersonal transactions that drive their sector, and they realize they're competing against businesses in other countries, like Japan, where companies enjoy both global network access and dense physical proximity. To lead the pack, a business has to be networked where the action is, not surfing the Web from an Idaho bunker.

Given those choices, most of the nation's productive Networked small and midsize businesses have become antipolitical, living in the quixotic hope that government will simply ignore them if they ignore it. Surviving in the shadow of urban Kluge politics, much of America's Networked industries have simply shifted to stealth mode, becoming invisible to the media and to political elites.

That political retreat forces many Networked companies either to opt for life as an embattled enterprise in hostile urban regions where Kluge interests are sacrosanct or to move to far less dynamic Provincial communities. The future, however, belongs to Networked companies: only they can offer the flexibility, teamwork, and unique products and skills that produce high wages and profits for a nation in the international economy.

How will you know if you've made it in the new economy? Unlike uncreative businesses in the periphery, you will have a fluid workforce, constantly expanding markets, and business partners -- suppliers and customers alike -- that vary as fast as you can think of and identify new applications for your company's skills. And if you, together with countless other Networked companies, can achieve such successes, you'll profit no matter what the increasingly complex, cutthroat global economy may throw your way during the next millennium.

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David Friedman is a research fellow in the MIT Japan program. His most recent article for Inc. was "The Enemy Within," published in October 1995.

20 QUESTIONS

Where does your company fit among America's three economies? Here's a quick way to determine if you're a Networked, Provincial, or Kluge enterprise

1. Which does your company value most?

a. Constant interaction with other companies and individuals to define new products and services

b. Locating in regions with the lowest wage, regulatory, and tax burdens

c. Gaining access to key public officials

2. Which best describes your company's staff?

a. Individuals whose responsibilities are constantly evolving and among whom lines of authority are blurred

c. It's a source for key members of your board or project-team leaders

20. Which best describes where you'd like to be in 20 years?

a. The respected founder of a major new industry

b. Fishing in Utah

c. Chair of a national technology-policy commission

Scoring

Give yourself 0 points for each A, 5 points for each B, and 10 points for each C response.

0-40: You're a solid member of the Networked economy.

41-80: Your company has many characteristics in common with Networked companies, but you're also tending toward the low-skill, low-wage Provincial-economy model.

81-120: You're a solid member of the Provincial economy. Expect increasing wage and price pressures not just from businesses in other Provincial regions but from low-skill, low-wage launching platforms throughout the world.

121-160: You're midway between the Provincial and Kluge economies -- hardly a happy mix for the 21st century, with global price competition increasing and the public sector shrinking.

161-200: Your company is a core Kluge-economy participant. You're probably in more trouble than an endangered species.